Annuities and loans
Loan payments and amortization
Calculate installments and build the schedule that splits each payment into interest and principal.
16 minintermediateMembers
Learning objectives
- Convert annual loan terms into periodic terms
- Calculate a level loan payment
- Build an amortization schedule
Most loans are repaid in level installments. Each payment first covers the interest on the outstanding balance; the rest repays principal. Early payments are mostly interest, later ones mostly principal.
Always match the rate to the payment frequency: a 6% annual rate with monthly payments means a 0.5% monthly rate and 12 × years payments.
PMT = PV × r ÷ [1 − (1 + r)⁻ⁿ]
- r
- periodic rate (annual rate ÷ payments per year)
- n
- total number of payments
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.